Despite what you may have heard about an inflating market bubble, the US stock market isn’t rising. The once-hot S&P 500 has been cutting a herky-jerky path sideways for months. What happened? Back in May, the Magnificent Seven big tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) surrendered the market leadership they’ve held for years. For a few weeks, a group of semiconductor stocks including Micron and Broadcom took up the baton, but recently they have faded, too. This week, tech stocks’ back-and-forth volatility has been especially intense, and a big AI-driven hedge fund, Situational Awareness, blew up.
It is tempting to say that markets are going mad, as they occasionally do. Amid the excitement of the AI revolution, tech stocks have become creatures of hype and price momentum. Now they are wobbling, and a panicked sell-off seems possible.
There is always plenty of irrationality in stock prices, and valuations are frighteningly high at the moment. But the recent changes in market leadership do not reflect the madness of crowds. Instead, the market is struggling — as rationally as could be hoped — to answer a hard question: what is the competitive structure of the AI industry, or indeed of an economy where AI is everywhere?